Is Unemployment Insurance Up To Scratch?

Figures out today show a doubling in the number of unemployment-insurance claims. But is this cover any good?

According to trade body the Association of British Insurers (ABI), the number of new claims made against unemployment insurance policies exploded late last year. In fact, unemployment claims on payment protection insurance (PPI) more than doubled between November 2007 and November 2008, as shown below:

PPI unemployment claims

Source: ABI. These data are based on responses from 79% of the market, with the figures inflated to represent the whole market.

As you can see, the number of unemployment claims for September to November 2008 (51,027) was more than double that for the same period in 2007 (25,427). What's more, the rate of increase is accelerating: the year-on-year rise in September 2008 was 69%, but November's yearly hike was a whopping 118%.

Of course, you'd expect the number of unemployment-insurance claims to be sky-rocketing, because unemployment is increasingly steeply across the UK. Indeed, thanks to the UK entering a recession last year, unemployment rose by 349,500 in 2008. Sadly, economists are predicting that unemployment will rise by between 600,000 and 1.2 million in 2009, which is a shocking outlook.

In many ways, recent events take me back to the early Nineties, when I worked for one of the UK's leading providers of payment protection insurance. Imagine a row of claim files three feet high stretching for over forty feet across an office and you can see why we had plenty of opportunities for overtime and weekend work!

How well does unemployment insurance work?

Of course, insurance companies do not accept every unemployment claim they receive. Indeed, during the last recession, insurers actively sought to reject claims in order to keep their profits high. So, look out for these loopholes, get-out clauses and hurdles to clear:

1. All unemployment insurance policies require you to be registered with the Jobcentre and `actively seeking re-employment'. In other words, you must provide proof that you are not working and are looking to return to work, including job-application and rejection letters, interview dates, etc.

2. All policies include what's known as an `initial unemployment exclusion clause'. This prevents claims from being made in close proximity to the start of a policy. Usually, this exclusion lasts for 60 to 120 days from buying a policy. So, make an unemployment claim in the early days of a policy and it's sure to be rejected immediately.

3. In addition, most policies also include a `reasonably aware' exclusion to prevent workers from taking out a policy in anticipation of making a claim. For example, if you buy a policy only after learning that your employer intends to make redundancies in your area, then your claim is likely to fail. As insurers will tell you, they are in the business of covering unexpected -- rather than likely -- events!

4. Another stumbling block is that many policies cover only redundancy, rather than unemployment. So, if you resign, are dismissed or leave a job for any reason other than compulsory redundancy, then your claim may fail. Indeed, the stricter policies also reject claims for voluntary redundancy.

5. Making a successful unemployment claim is particularly tough for self-employed people and those running their own company. Indeed, in some circumstances, you will be required to wind up your business due to insolvency before your claim will be considered.

6. If you're not in permanent employment, then your insurer will study your employment contract and history in order to establish whether unemployment is a `regular and recurrent' feature of your occupation. If you are a seasonal worker (for instance, you work in a seaside hotel), then unemployment will be a routine part of your working life, so your claim will not be paid.

7. Likewise, if you work on a short-term, specific or fixed-term contract (such as a specific building or construction project), then you may have difficulty arguing that your employment came to a sudden end, rather than expiring as planned.

8. Most policies also include a `waiting' or `excess' period, which varies from 14 to 90 days. During this excess period, you will not qualify for any payout at all. So, if you're off work for 80 days, but your policy has a 60-day excess period, then you will receive only 20 days' benefit. Most mortgage PPI policies have a 30- or 60-day excess period, so they don't pay out for the first month or two.

9. If your claim is accepted, then your monthly benefit will be paid until you return to work. However, in order for your claim to continue to be paid each month, you must submit a `continuation claim form' plus proof of ongoing unemployment.

10. Finally, all policies have a cap on how long you can claim, usually twelve months in a row. So, after a year, your claim will be closed, regardless of whether you've found work or not.

In summary, although unemployment insurance can provide a valuable safety-net to those out of work, this net does have some rather large holes in it. Then again, thanks to means-testing, National Insurance requirements and other restrictions, the same applies to Jobseekers Allowance and other state benefits. So, when it comes to being out of work, the only things you can really rely on are your strength of mind and your savings!

STOP PRESS: After I finished writing this article, the Competition Commission announced that it is to ban the sale of payment protection insurance (PPI) by lenders at the point of sale. In future, lenders will no longer be able to offer PPI when arranging credit cards, personal loans and mortgages -- and for seven days afterwards. Also, there will be a complete ban on single-premium policies bundled into personal loans.

This is terrific news for borrowers, millions of whom pay extortionate premiums for this rip-off accident, sickness and unemployment cover. This represents a major victory for the Fool (and other consumer champions), as we campaigned tirelessly against this swindle for six long years. Here's to lower prices and better choice in the PPI market!

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